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Banks, non-banks vie for small-business loans
(This article appeared in the July 16, 1999 edition of the Rochester Business Journal.)
By Amanda Campagna
Rochester, NY - July 16, 1999 -- When Samuel Ezzezew approached a local bank for a small-business loan, his request was denied.
Ezzezew, who moved to this country from Ethiopia 15 years ago, plans to open a gas station/ food mart on Portland Avenue. After the bank turned him down, he was referred to Business Lenders LLC by a friend.
"I wish I had gone there in the first place," he says.
Business Lenders representatives sat down with him and went over his business plan, eventually approving a $200,000 loan with a 20-year payment plan.
Ezzezew says there was no comparison between the bank's loan procedure and the one at Business Lenders.
"For me, (applying for the bank loan) was a waste of time," he says. "I found it much easier with Business Lenders."
Ezzezew is one of a growing number of small-business owners who are turning to non-bank sources when they need a business loan.
Mary Warhurst, Business Lenders executive vice president, says Ezzezew is an example of the type of customer her company serves - business owners who often have difficulty securing loans from commercial lending sources.
"We target the customer who may not look attractive to a large bank," she explains.
Connecticut-based Business Lenders, which fields 10 locations, including one in Rochester, financed some $53 million in guaranteed loans last year. Its average loan totals $327,000 - on par with the national average for small-business loans according to the U.S. Small Business Administration.
The automated credit scoring system used by most large institutions explains why many small-business owners have difficulty securing bank loans, Warhurst says.
"The whole picture does not show up in the credit score," she says.
Instead of using automated credit scoring, Business Lenders tries to evaluate prospective clients by considering a broader range of criteria.
In Ezzezew's case, Warhurst says, his automated credit score may have made him less attractive to the bank. When Business Lenders looked at his background and his family's work ethic, and took the time to understand his business plan and the research he had done, he emerged as a strong candidate for the loan.
Jan Pisanczyn, director of SUNY College at Brockport's Small Business Development Center, also thinks non-bank sources often are more accessible to small business owners looking to secure financing because there is not as much scrutiny involved he says.
Pisanczyn's office works with 1,000 to 1,200 small businesses a year, counseling them on how to get started, how to apply for a loan and how to deal with other problems they may confront.
Non-bank lenders are more apt to be interested in working with start-ups whose principals lack a strong credit history, but often require more in the way of collateral, Pisanczyn notes.
It is often easier for a small business to obtain a loan to purchase a tangible
object - such as real estate or inventory - than for start-up capital because that object can be used as collateral, he adds.
Although non-bank lending sources are perceived as a more expensive option, Pisanczyn says the cost difference in the long run is negligible. He also notes, however, that securing a loan from a commercial bank might offer many long-term benefits.
"It's much easier (to get future loans) if you've established a working relationship," he explains.
Looking ahead, Pisanczyn predicts competition among small-business lenders. Many economists think small companies are the leading source of new jobs, and he says banks and non-banks will vie for the opportunity to make loans to them.
"As long as banks and non-banks are seeing a return on their investments," he says, "I think there's going to continue to be substantial growth in this area."
That is good news for individuals like Ezzezew, who has big plans for his recently secured small-business loan.
He hopes to have his new business up and running within weeks. The existing gas station/ food mart has been closed for a year, but he hopes by reopening it he can improve the neighborhood's atmosphere and provide jobs for some of its residents.
